Bill McNeil and Fernando Flores in the Daily Journal: The Effect of Arbitration Agreements on Low-Wage Workers

On April 3rd the state Supreme Court heard oral argument in Sonic-Calabasas A., Inc. v. Frank Moreno and considered the preemptive reach of the Federal Arbitration Act as it relates to the ability of claimants to pursue their claim using the labor commissioner’s “Berman” process. In an article in the Daily Journal, LAS-ELC attorneys Bill McNeill and Fernando Flores explain that the court’s decision could potentially prevent workers from utilizing the accessible and affordable administrative forum, and could instead require them to participate in the costly and complicated arbitration process when their employers subvert basic labor protections.

In [Sonic-Calabasas A., Inc. v. Frank Moreno], 15 Cal. 4th 659 (2011), judgment vacated 132 S. Ct. 496 (2011), the state Supreme Court originally ruled that the administrative process cannot be preempted by an arbitration clause. The decision specified that an employer cannot compel its employees to relinquish their statutory right to pursue a claim using the administrative process as a condition of employment. The court recognized this as an “unwaivable right.”

Sonic-Calabasas then filed a petition for writ of [certiorari] with the U.S. Supreme Court, asking the court to vacate and remand the state Supreme Court ruling in light its decision in [AT&T Mobility LLC v. Concepcion], 131 S.Ct 1740 (2011). In [Concepcion], the U.S. Supreme Court upheld a consumer contract that contained a waiver of class action arbitrations. The court concluded that that the FAA preempts a state law that forbids waiver of class action arbitration. [Sonic-Calabasas] is yet another decision that could elevate the role of arbitration at the expense of access to justice.

Over the past 25 years, the range of disputes subject to binding arbitration — particularly as a result of pre-dispute arbitration agreements — has grown dramatically. The U.S. Supreme Court has issued a series of arbitration-related decisions on such topics as the availability of class arbitration; the preemptive effect of the scope of judicial review of arbitral awards under the FAA; the enforceability of mandatory pre-dispute arbitration agreements; and the arbitrability of public law claims.

These often controversial rulings have had an enormous impact on business, consumers and the workplace, and have transformed the dispute resolution landscape. Somewhat lost in the discussion is the likely impact of these decisions on working poor people. Low-wage workers frequently face wage theft and workplace retaliation that directly threaten their basic livelihood. These same workers often find it difficult to access a judicial forum due to prohibitive costs, complex processes and language barriers.

Nonexempt employees in low-wage industries across California often use the labor commissioner’s Berman process to redress wage and hour violations, particularly violations of basic labor protections such as the minimum wage. Under the statutory framework provided by Labor Code Section 98 [et seq.], upon the filing of a wage claim by a worker, the labor commissioner is authorized to investigate the claim, conduct hearings and issue orders in an effort to resolve the complaint. These proceedings are accessible to low-wage workers because they provide interpreters and multi-lingual claim forms, and does not require a filing fee. Should mandatory arbitration clauses foreclose low-wage workers’ ability to pursue their claims through the labor commissioner, workers will lose an affordable and effective forum in which to pursue their claims.

In recognition that many employees in low-wage industries are immigrants, the labor commissioner provides its claim form in seven different languages (English, Spanish, Chinese, Korean, Vietnamese, Tagalog and Punjabi). Additionally, there is no filing fee, and if the claimant requires an interpreter, one will be provided. During hearings, procedural and evidentiary rules are informal, reducing the need for legal representation. Unrepresented workers generally face minimal, if any, procedural roadblocks in pursuing their claims, as the labor commissioner guides all parties through the Berman process. Removing these impediments allows workers a means to adjudicate their claims.

Compared to the Berman process, arbitration is costly, procedurally more complex, and does not provide for interpreter services. The American Arbitration Association’s Employment Arbitration Rules are provided in English and Spanish only. Although the rules are more relaxed than state and federal court, parties still face procedural hurdles. For example, Employment Arbitration Rule 8 requires that an Arbitration Management Conference be held, at which the matters to be considered include “the law, standards, rules of evidence, and burdens of proof that are to apply to the proceeding; ... the scope of witness testimony and witness exclusion; ... the value of bifurcating the arbitration into a liability phase and damages phase; ... [and] the extent to which documentary evidence may be submitted at the hearing ... .” Each of these issues carries significant value in advancing a claimant’s case. Low-wage workers are generally unable to secure counsel and are required to make strategic legal decisions on their own. This will put them at a serious disadvantage in an arbitral forum.

It is important to note that low-wage workers are usually not aware that they have entered into an arbitration agreement when they begin a job, as these clauses are often buried at the bottom of a contract or other binding document. Whether set forth in an employment manual or job application, the terms of arbitration are usually not stated clearly and are often not in a worker’s native language. If individuals like these are prevented from pursuing their claims through the labor commissioner and are unable to obtain counsel, they will instead have to engage in a costly and complex process that presents challenges for even seasoned attorneys.

By way of history, the U.S. Supreme Court has previously recognized that a claimant could argue that an arbitration agreement is unenforceable because an unfair aspect of the arbitration process precludes that party from vindicating her statutory rights. [Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.], 473 U.S. 614, 637 (1995) In [Gilmer v. Interstate/Johnson Lane Corp.], the court noted that arbitration would not be allowed where it fails to include appropriate safeguards in terms of fair procedure and remedies that would ensure substantive statutory protections.

The court subsequently expanded on that theme. In [Green Tree Financial Corp.-Alabama v. Randolph], the plaintiff claimed that the potential for excessive forum fees she could incur if she was required to go to arbitration prevented her from vindicating her statutory rights. The Supreme Court held that “claims arising under a statute designed to further important social policies may be arbitrated so long as the prospective litigant effectively may vindicate [her] statutory cause of action in the arbitral forum.” [Green Tree], 531 U.S. at 90 (internal quotation marks omitted). And the court adopted a case-by-case approach to this issue, holding that parties bear the burden of establishing that costs will be prohibitive. The court seemed to recognize that excessive or overly burdensome forum fees, if proven, might bar a court from enforcing an arbitration agreement on the grounds. Similarly, in [Sonic-Calabasas], the court should not overlook the burden that arbitration costs may impose on low-wage workers.

Although the discussion surrounding the rise in arbitration agreements has largely focused on the fundamental attributes of arbitration and the FAA’s preemptive reach in the context of state and federal laws, the potential impact of foreclosing venues like the labor commissioner to California’s low-wage working population should not be forgotten. When the California Supreme Court hears [Sonic-Calabasas], the justices must consider how the court’s decision will impact low-wage workers and their access to affordable and appropriate governmental forums. Denying low-wage workers administrative remedies will effectively deprive them of access to justice and will prevent them from vindicating their statutory rights.